1. DG Agriculture and Rural Development European Commission
Price volatility in agricultural markets: drivers and implications December 2012
DG Agriculture and Rural Development
European Commission

2. Outline
Driver(s) of price volatility: no "smoking gun"?
What people says. What data shows
Implications

3. Long term commodity price trends
Source: World Bank. Note: 2012 figures are forecasts as of September 2012. 3

4. While the commodity price boom has been attributed to many factors…
Common/macro factors
Economic growth
Weak dollar
Fiscal expansion
Low cost of capital
Financialisation of commodities
Sector-specific factors
Exogenous to agriculture
Energy prices
Weather
Food demand
Biofuels
Endogenous to agriculture
Policies
Underinvestment
Low stocks

5. … the "perception" attributes the 2007-2008 agricultural price boom to a selective few
Common/macro factors
Economic growth
Weak dollar
Fiscal expansion
Low cost of capital
Financialisation of commodities
Sector-specific factors
Exogenous to agriculture
Energy prices
Weather
Food demand
Biofuels
Endogenous to agriculture
Policies
Underinvestment
Low stocks

6. Four basic questions to understand high and volatile commodity prices
Is price volatility higher than in the past?
Is this driven by higher yield variability?
Is it due to a sharp increase in food demand?
Are agricultural prices more sensitive to stock changes?

7. 1. Is price volatility higher than in the past?
The analysis over the last 50 years shows:
Price volatility higher in recent decade for most products, but lower lately
Exception only for beef, poultry, sugar (higher in the 70s)
EU price volatility was higher than at world level (CAP reform process of market orientation)

8. Long term price developments for key agricultural commodities
Source: World Bank

9. Coefficient of variation for selected products, long-term price series
Source: World Bank

10. Coefficient of variation for comparable products, 1997-2003 vs 2004-2010, EU and World
Sources: Agriview and World Bank

11. 2. Is higher price volatility driven by higher yield variability?
The analysis shows:
No straightforward conclusions can be drawn
Different between countries and commodities

12. Yield variability for 12 years periods - World
Sources: USDA, FAO

13. Yield variability for 12 years periods - Wheat
Sources: USDA, FAO

14. Yield variability for 12 years periods - Maize
Sources: USDA, FAO

15. Yield variability for 12 years periods - Rice
Sources: USDA, FAO

16. Yield variability for 12 years - Soybeans
Sources: USDA, FAO

17. Yield variability for 12 years - Sugar
Sources: USDA, FAO

18. 3. Is higher price volatility driven by sharp increase in food demand?
The analysis shows:
Agricultural products: Demand growth has decreased over the last 50 years for most products and countries (exception veg. oils and dairy products)
Energy and minerals/metals: Demand growth is on the increase since mid 80s (iron, aluminium) and mid 90s (crude oil)

19. Growth rates for main agricultural products, crude oil and selected minerals/metals
World per capita demand growth for agricultural commodities, USDA, FAO. World production growth for crude oil (International Energy Agency) and
Metals/minerals (U.S. Geological Survey)

20. 4. Are agricultural prices more sensitive to stock changes?
The analysis shows:
The relationship between stock-to-use and world prices did not change much over the last 50 years.
A certain increase in responsiveness can be observed for the main crops (wheat, maize, soybean) in the two past decades.
Sugar prices on the other hand were more sensitive to stock changes in the 70s and 80s than recently (link with oil price).
No significant linkage for rice and vegetable oils.

21. Yearly changes in stocks to use and prices Maize
Source: World Bank, USDA

22. Yearly changes in stocks to use and prices Wheat
Source: World Bank, USDA

23. Yearly changes in stocks to use and prices Soybeans
Source: World Bank, USDA

24. Yearly changes in stocks to use and prices Rice
Source: World Bank, USDA

25. Evolution of stock-to-use ratio - wheat
Sources: USDA for stocks and use, World Bank for prices (nominal prices)

26. Evolution of stock-to-use ratio - maize
Sources: USDA for stocks and use, World Bank for prices (nominal prices)

27. Stock-to-use / price relation: wheat
Sources: USDA for stocks and use, World Bank for prices (nominal prices)

28. Stock-to-use / price relation: maize
Sources: USDA for stocks and use, World Bank for prices (nominal prices)

29. What matters most for what prices?
Source: World Bank Global Economic Prospects January 2012 – Commodity Annex

30. Ongoing research: are there distortions?
Spot market
Futures market
Options market
Convergence close to maturity
High frequency volatility estimation
Historical vs risk neutral measure for put&call pricing

31. Implications
Higher prices for agricultural commodities will not necessarily result in higher income for farmers, especially if their margins are squeezed by increased costs
With higher output prices expected, there is less and less scope for "traditional" intervention tools, such as price support
Excessive price volatility affects profitability and hinders investments in the agricultural sector
Ad-hoc policy intervention in agriculture to address volatility may be questionable if volatility is "imported" from outside agriculture